" /> Six choice banking stocks to bet on | Hallmarknews
Published On: Tue, Aug 29th, 2017

Six choice banking stocks to bet on



Banking sector stocks have always been investors fast choices. Nigerian investors buy up bank stocks like fish take to water. But over the last twenty four months, the sector has seen its own fair share of trouble as cost-to-income ratios rise, net interest incomes (the difference between interest income and interest expense) have narrowed and non-performing loans (NPL’s) have remained even if falling. Are we seeing the first signs of smart money looking for new frontiers? Not necessarily.
Nigeria’s banking sector is still a good place to park investment cash, but not all bank investments were created equal. Analysts have narrowed down their favourite picks to six banks with hopefully strong future earnings potential.

Guaranty Trust Bank Plc…the wages of good conduct is gain
GT (recent price N40.07) has come a long way from the days when it was a second-tier financial institution run by two fresh-faced gentlemen who looked more like audit trainees than bank owners. Fola Adeola and Tayo Aderinokun (now late) may not have looked the part but they were both young men with dreams bigger than their slight frames. More importantly both of them had a notion of banking beyond the ordinary and tested. In an interview with one of the duo, Fola Adeola in 2014, he noted that, ‘ we recognized quite early that we were not going to become exceptional and get market share if we offer the same service as those already in the business, so we decided to be different. The first thing we decided upon was that we were not going to be a bank of men but a bank run by rules. This was not an easy decision’. Adeola admitted that the two founders had to lock themselves up in a room and pound out the ground ethical considerations for running the bank. ‘What finally came out’ says Adeola, ‘was good but did not come easy. We had a challenge of deciding between commercial imperative and business values; we decided that our values would trump our pursuit of profit’.
Twenty six years after, GT has become a talismanic part of Nigeria’s bustling financial service sector, year-to-date its share price has risen 59.92 per cent and grown by a stunning 72.64 per cent on a year-on-year basis. On its recent share price of N38.49 (it’s highest in the last five years) the bank still has potential upward or hidden value opportunity as its price to earnings ratio (p/e) remains a modest 8 times 2016 earnings per share or what amounts to a capitalization rate of 12.5 per cent. With an indicated dividend yield (dividend declared divided by current market price) of 5 per cent, the bank offers investors a combined investment yield in excess of four and a half times the current rate of inflation of 14 per cent per annum.
The banks strong corporate banking profile and its growing retail banking reputation suggests that its earnings will continue to grow strongly. So far on a five year compound growth basis earnings has darted ahead at an average growth rate of 10 per cent per annum.

Zenith Bank Plc…the king of the retail market pulls a bigger chariot
When Godwin Emefiele, Governor of Nigeria’s Central Bank, strolled across the park from operator to regulator, the bank he left behind Zenith Bank Plc (recent price N23.02) was at the cusp of a makeover. Emefiele who took over the helms from the banks founder Jim Ovia had performed a holding role, ensuring a smooth transition from the pioneer managing director to a succession of next generation managers. Kenneth Amangbo has deliberately and conscientiously led the bank down new hallways. Zenith’s primary competitive strength had traditionally been its retail market presence particularly within markets with traders of eastern Nigeria extraction. Amangbo has, however, since taking over the bank as chief executive officer mixed things up a bit. He has grown the corporate banking side of the financial houses business while also making the bank less sectional in its customer base and market appeal. Judging by recent half year (H1) 2017 results of the bank the gambit appears to be paying off.
The banks earnings after tax has grown by a hefty 112 per cent between H1 2016 and H1 2017, rising from N35.5 billion in 2016 to N 73.3 billion in H1 2017.  It also appears to have been able to improve its net interest income suggesting improved profitability in its core line of business of lending and deposits. Nevertheless charge offs for non performing loans (NPL’s) still seem high even though it has started to drop. Year-to-date its stock price has soared by a stunning 56.61 per cent on a price earnings ratio (an index that ties its price to its underlying profit) of 4.81 compared to stiff rival GT Bank’s 8.42, it seems a pretty fair reflection of Zeniths upside price potential and its basic hidden value opportunity going forward. The bank has an indicated dividend yield of 8.74 per cent which when combined with a year-to-date price yield of 56 per cent gives a combined recent yield of just under 70 per cent, a hard number to beat even if adjusted for risk by bond market investors.

UBA Plc…an African ranger with a clever aim
United Bank for Africa (UBA) (recent market price N9.70) used to be a fuzzy bank with an identity crisis. Under the Chairmanship of Ayora Elizabeth Kuforiji-Olubi, it was a famously strong retail franchise with a knack for whipping up catchy savings products that created relatively stable low cost medium term deposits. The bank also had a snappy ‘wise men bank with UBA’ catchphrase which caught on fast and gave it top of the mind customer recall. This epoch soon ended with one of Nigeria’s most enigmatic Harvard-trained   wheeler dealer businessmen, Hakeem Belo-Osagie taking over Chairmanship. The Bello-osagie era quickly saw the bank spiral into all kinds of tangled financial transactions some of which were allegedly barely above criminal. This was in addition to sleazy rumours about boardroom romances and high-handed appointments and promotions. In the midst of the bank losing its way, a fleet-footed takeover bid was initiated by consummate deal-maker, Tony Elumelu, who was the erstwhile Managing Director of the much smaller but better run, Standard Trust Bank (STB). Today UBA is a business machine with clarity of purpose and an upper crust leadership to drive its goals.
UBA’s definitive strategy over the last five years has been to diversify country risk by deliberately expanding operations into more stable competing African economies. This has resulted in over twenty five per cent of the bank’s annual profit coming from outside the country, a strategy that has helped buoy earnings while shielding its operations from the vagaries of domestic central bank policies.
On a five year compound annual basis UBA’s earnings has grown by a sober but decent 6 per cent with an indicative dividend yield of 7.89 per cent. Year-to-date UBA’s share price has grown by a nifty 107.78 per cent as against the equally racy 147.76 per cent year-on-year. The banks indicated combined yield by far outpaces domestic inflation rate and leaves investors with a real yield of about 121 per cent. Going forward UBA earnings will likely climb by a further6.3 per cent in 2017 and lead to a total dividend of about 82kobo per share (as against 75 kobo in 2016). The bank has already declared an interim 2017 dividend of 20 kobo per share and looks set enhance investor’s portfolio yields.

Access Bank Plc… twin warriors, crouching tiger
In early 2000 Access Bank (recent price N10.15) was still a dreamy second rate institution with pretensions to greatness. Its staff were little better than choreographed pen pushers and key punchers with little imagination. The old owners of the bank simply wanted an institution that would carry on the genteel traditions of old business money without upturning the applecart. Unfortunately dreams are not horses and beggars do not ride. The banking system was swiftly changing and the landscape was no longer for the lily-livered or the weak, like Dinosaurs such banks were destined to die. Realizing this and the huge opportunity that a floundering bank like Access could offer at a reasonable acquisition price, Aig Aig-Imoukhuede and Herbert Wigwe, two former directors of Guaranty Trust Bank swooped on its shares, took over management and within five years turned it into one of the fastest growing banking franchises in the country.
A combination of hard work, vision and at times sheer ruthlessness combined to make Access Bank one of the less talked about hidden value opportunities in the banking sector. Half year (H1) 2017 results give insight into the banks likely yearend earnings and dividend payout (after an interim dividend announcement of 25kobo per share). The bank’s net interest income (an indication of its performance in its core business) grew from N68 billion in H1 2016 to N83billion in H1 2017, a rise of 21.3 per cent. This clearly means that the bank has kept a tidy spread between interest earned from its lending business and deposits paid customers. Thankfully impairment charges seem to be under better control, although above N10 billion in both half years it constituted 12.5 per cent of net interest income in 2017 as against 14.9 per cent of net interest income in 2016. Where the bank appears to have trouble is its other operating expenses. These expenses grew from N48 billion in H1 2016 to N69billion in H1 2017, or a worrying 44.7 per cent. Most of the rise came from an 82.3 per cent upturn in administrative expenses, a 42.2 rise in professional fees plus a 69.6 growth in advertisement and marketing expenses and a whopping kiting of stationery and postage costs which grew 87.9 per cent.
Nevertheless with twelve trailing month (TTM) earnings per share (eps) at 4.11 and a one year forward earning per share projection of N2.90, the bank still gives a hidden value opportunity of between 15 and 20 per cent at its recent market price of N10.15.

Contrarian gambits:
FBNH…an elephant’s wobbly comeback
FBNH has had a torrid time in the past two years trying to reestablish itself as a major banking franchise once considered the biggest beast in the Nigerian banking jungle. The elephants slide down a muddy financial pathway has, hopefully, stopped and its new management led by UK Eke at the Holding company level and Dr Adesola Adedutan at the First Bank of Nigeria level is slowly but surely reasserting market credibility. The figures are not yet sparkling but they do signify hope, and would fit nicely in a contrarian’s investment strategy.
Half year 2017 the Holdco was able to grow its net interest income by a lively 18.9 per cent, growing from N126 billion in H1 2016 to N164 billion in the contemporary period of 2017.  A further pleasing sight is that impairment charges have started trending downwards with impairment costs dropping 10.7 per cent from N69.9 billion in H1 2016 to N62.1 billion in H1 2017.  As far as the stock market is concerned notes Peter Aletor Chairman Apel Assets and Trust, ‘the Holdco has paid penance, the economy is likely to forgive and profit benediction may begin to flow starting from the last quarter of 2017’.
However at a price-to-earnings (p/e) multiple of 16.57 the bank seems a bit over priced at its recent market value of N5.97, but this is on a trailing twelve month (TTM) basis, on a forward earning per share forecast of 0.42 in 2017 at a current price of N 5.97, the p/e would drop to 14.21 which would still be about 66 per cent than GT Bank. FBNH has narrow immediate hidden value potential but as a growth stock it shows opportunities in years ahead especially if its present management cuts the FBN’s cost to income ratio and slashes impairment charges by another 25 or 30 per cent.
Union Bank…from rustic to renewed
Somewhat similar to FBNH, Union Bank Plc (recent price N5.90) is coming off a difficult patch. One of the oldest financial houses in Nigeria the bank has had a checkered history over the last decade when it narrowly avoided being acquired in a hostile takeover by the twin tigers of Access Bank between 2004 and 2005 and almost found itself going under at the outset of the 2007/2008 economic recession.
Since those difficult days the banks has since been able to paddle along nicely; it has gradually reduced its bad loans and grown a healthier asset portfolio. In H1 2017 the bank grew its net interest income from N30.9 billion in H1 2016 to N31.7 billion, a marginal growth of 2.6 per cent. Cheerily, however, impairment loss provisions slid from  N8.78 billion in H1 2016 to N 5.38 billion in H1 2017, representing a huge 39 per cent tumble.
Against the background of an upward-looking future, investors can expect the bank to produce modest hidden value opportunities at a pace faster than competing laggards. UBN’s p/e of 7.25 on a trailing earnings per share of 0.81 gives it some immediate headroom for upward price adjustment. With year to date yield of 23.58 per cent, year-on-year price growth of 65.78 per cent, and an indeterminate dividend yield expectation for 2017, the stock does carry some risk but the upside opportunities far outweigh the downside regression.
With the Nigerian Stock Exchange All Shares Index (ASI) galloping at an impressive 36.36 per cent year-to-date and an equally remarkable 40.36 per cent year-on-year the chilly weather for the month of August should give way to some really warm feelings in the first quarter of 2018 when corporate yearend results begin to be released. With the market generally in a bullish mood, selective bank stocks appear set to put some nicely-sized mullah in the pockets of investors.

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